Why was the ECML unprofitable for so many years until LNER?

[Nicholas Lewis]

It must be very difficult to work out precisely the real cost of running a franchise. There are some things you cannot estimate - you just have to allow contingencies. You can make an estimate of passenger growth, but forecasting what will actually happen is impossible. Major external factors may impinge on what you'd planned. If your bid is cautious, someone may outbid you. It costs a lot to make a bid: I think at towards the end of the franchising period, it was frequently around £2 million. You don't want to spend all that and lose. Anyway, what is "overbid"? You won't know till someone's done it.

Some examples of the uncertainties in all this:
1) According to Roger Ford in about 2007, bids two and three for the South Western franchise totalled less than the bid from Stagecoach. I think the figures very roughly were Bids 2 and 3 about £650,000 million each and Stagecoach £1.3 billion. Stagecoach ran the franchise successfully at that level, but they could have won with £700,000 million.
2) In 2007/08, National Express bid more for the East Coast than GNER had a few years previously, but GNER had failed. Why did NatEx do that? They had been losing franchises and may have been desperate to win something. Could they have run it successfully? We don't know, because the 2008 recession came along and passenger numbers dropped.
3) West Coast in 2012: it is widely considered that First had overbid and ought to thank Richard Branson for seeking a judicial review which DfT found they didn't have the evidence to contest, so the offer to First was withdrawn. We'll never know how things would have panned out.
4) South Western in 2017: First/MTR won. One version of the story says they bid less than Stagecoach, but Stagecoach hadn't fully met the specification DfT had issued. First/MTR were making losses before Covid arrived and changed everything. We'll never know if their planned timetable and frequencies would have worked; doubts certainly exist.

Is there a common factor? Yes, the DfT, which ought to be able to assess whether bids are realistic and achievable. But their crystal ball isn't perfect either, and no doubt they were under pressure to get the best possible price for each franchise in order to justify the amounts that the Treasury were putting into the railways.

It was an open competition if companies wanted to throw away their shareholders money thats up to them it cost the taxpayer less and the services never stopped running when they got into trouble.

 

[Bald Rick]

What motivated the companies to overbid? I don't see how that was potentially advantageous to them.

They didnt think they were overbidding. They thought they had bid a winning sum that would make the money.

In the case of the East Cosst, NX (allegedly) famously came second, but the winning bidder was ‘persona non grata’ with the DfT for some indiscretion or other and so it went to NX.

 

[Clarence Yard]

The problem with the ECML contests was the way the revenue was calculated and the risks that the owning groups were prepared to take on it.

Unfortunately the DfT was wedded to MOIRA 1. It’s an industry system that tends to predict revenue “growth on growth” so it can overestimate future revenue on key flows if it has already seen substantial growth. The ECML is such a cash cow for the DfT budget that it needs the maximum it can get and that attitude is still largely there. It has expected revenues for various timetable scenarios and, in a bid situation, you will get marked down if you don’t meet them.

I have been involved in 2 losing ECML bids and in both cases our revenue was pretty much spot on to what actually occurred. In bidding in the old franchise competitions, you can put rolling stock, timetable and infrastructure caveats into your franchise agreement but getting your bid revenue line wrong without good reason can be really expensive for your owning group because you can rarely make up the difference, especially if your revenue assumptions are wrong from almost day one.

 

[Adrian1980uk]

The problem with the ECML contests was the way the revenue was calculated and the risks that the owning groups were prepared to take on it.

Unfortunately the DfT was wedded to MOIRA 1. It’s an industry system that tends to predict revenue “growth on growth” so it can overestimate future revenue on key flows if it has already seen substantial growth. The ECML is such a cash cow for the DfT budget that it needs the maximum it can get and that attitude is still largely there. It has expected revenues for various timetable scenarios and, in a bid situation, you will get marked down if you don’t meet them.

I have been involved in 2 losing ECML bids and in both cases our revenue was pretty much spot on to what actually occurred. In bidding in the old franchise competitions, you can put rolling stock, timetable and infrastructure caveats into your franchise agreement but getting your bid revenue line wrong without good reason can be really expensive for your owning group because you can rarely make up the difference, especially if your revenue assumptions are wrong from almost day one

The other thing I notice the ECML is the revenue predictions have always been based on fulling existing services rather than substantially increasing services. I'll always argue there's a limit to the number of trains that can run full before you start putting people off. If the reputation is that I'll be lucky to get seat then I might take the car for example

 

[Route115?]

The problem with the ECML contests was the way the revenue was calculated and the risks that the owning groups were prepared to take on it.

Unfortunately the DfT was wedded to MOIRA 1. It’s an industry system that tends to predict revenue “growth on growth” so it can overestimate future revenue on key flows if it has already seen substantial growth. The ECML is such a cash cow for the DfT budget that it needs the maximum it can get and that attitude is still largely there. It has expected revenues for various timetable scenarios and, in a bid situation, you will get marked down if you don’t meet them.

I have been involved in 2 losing ECML bids and in both cases our revenue was pretty much spot on to what actually occurred. In bidding in the old franchise competitions, you can put rolling stock, timetable and infrastructure caveats into your franchise agreement but getting your bid revenue line wrong without good reason can be really expensive for your owning group because you can rarely make up the difference, especially if your revenue assumptions are wrong from almost day one.

Thats interesting as MOIRA 1 forecasts increased demand from improved timetables using pasenger demand forecast handbook data. There are interesting issues where different operators run on the same route (and there have been issues with 'ORCATS' raiding). However it won't forecast increases owing to economic growth, changes in modal split, or indeed improved rolling stock or more reliable servicess. There are plenty of forecasting models but not MOIRA 1. I know that a lot of later franchises had 'cap and collar' agreements and other systems for dealing with economic growth varying with that in the model. Its all very hazy in my mind, others might know more about this.

The problem may have come from extrapolating a few years very good growth that might not be sustainable, but who can forecast factors like economic growth and shifts in modal share?

 

[DynamicSpirit]

The other thing I notice the ECML is the revenue predictions have always been based on fulling existing services rather than substantially increasing services. I'll always argue there's a limit to the number of trains that can run full before you start putting people off. If the reputation is that I'll be lucky to get seat then I might take the car for example

I think that's very true: People will get put off if the trains are routinely full. But that doesn't mean you can't get the revenue from lots of your trains being full - it just means that to get that much revenue, you need 'true' passenger demand to be a bit greater than capacity on those trains, with the excess passengers put off by the trains being full. From a social point of view, that's not a good place to be, and it means you really should be looking to improve capacity so you're not putting people off - but it's not an impossible situation when doing revenue forecasts.

 

[hwl]

The problem with the ECML contests was the way the revenue was calculated and the risks that the owning groups were prepared to take on it.

Unfortunately the DfT was wedded to MOIRA 1. It’s an industry system that tends to predict revenue “growth on growth” so it can overestimate future revenue on key flows if it has already seen substantial growth. The ECML is such a cash cow for the DfT budget that it needs the maximum it can get and that attitude is still largely there. It has expected revenues for various timetable scenarios and, in a bid situation, you will get marked down if you don’t meet them.

I have been involved in 2 losing ECML bids and in both cases our revenue was pretty much spot on to what actually occurred. In bidding in the old franchise competitions, you can put rolling stock, timetable and infrastructure caveats into your franchise agreement but getting your bid revenue line wrong without good reason can be really expensive for your owning group because you can rarely make up the difference, especially if your revenue assumptions are wrong from almost day one.

Pretty much agree.

With the winning VTEC bid the growth reference bench marking point was the day of bid submission, EC management eased up on active growth iniatives at almost exactly that point resulting in VTEC being hugely behind what they bid on by day 0 of the contract, from which it would be impossible to catch up on even if there hadn't been other bad luck that reduced London leisure visitor numbers. If DfT had benchmarked just before contract start the impact the would have been a large difference.

The were also signs that the relationships between Central London employment metrics traditionally used to generate rail growth tends had already started changing for the worse before bidding.

The traditional relationship between various % growth rates (PAX, cost and revenue) were also breaking down long before bidding and DfT assumption needed completely rebasing from actual not compounded growth rates. In many cases 1% difference related to nearly twice the actual amounts from decade earlier.

 

[Ken H]

Pretty much agree.

With the winning VTEC bid the growth reference bench marking point was the day of bid submission, EC management eased up on active growth iniatives at almost exactly that point resulting in VTEC being hugely behind what they bid on by day 0 of the contract, from which it would be impossible to catch up on even if there hadn't been other bad luck that reduced London leisure visitor numbers. If DfT had benchmarked just before contract start the impact the would have been a large difference.

The were also signs that the relationships between Central London employment metrics traditionally used to generate rail growth tends had already started changing for the worse before bidding.

The traditional relationship between various % growth rates (PAX, cost and revenue) were also breaking down long before bidding and DfT assumption needed completely rebasing from actual not compounded growth rates. In many cases 1% difference related to nearly twice the actual amounts from decade earlier.

Was the railway aware that working from home and online meetings were becoming a thing after 2010. I know people who were doing the odd day at home back in 2015 without any comments about it being unusual exceppt the classic about decorating the kids bedroom. And back then there was Skype which was in general use for meetings in 2015 to my knowledge.
Its easy to blame Covid for the change in peoples working arrangements and the societal change that brought. But the writing was on the wall. Covid just accelerated the change.
Did TOC's not see this coming????

 

[Adrian1980uk]

Was the railway aware that working from home and online meetings were becoming a thing after 2010. I know people who were doing the odd day at home back in 2015 without any comments about it being unusual exceppt the classic about decorating the kids bedroom. And back then there was Skype which was in general use for meetings in 2015 to my knowledge.
Its easy to blame Covid for the change in peoples working arrangements and the societal change that brought. But the writing was on the wall. Covid just accelerated the change.
Did TOC's not see this coming????

There is of course realities of the day as well, the narrative was of a overcrowded railway and the need for more seats not less passengers.
To be fair even now the rail network is busy but the challenge is that it's not busy busy with premium passengers hence the gap in revenue.

It will take time for services to adjust for the new flows as the railways aren't known for their ability to change quickly, but my take is that there is light at the end of the tunnel and my feeling is that this year's figures will show LNER at least more or less breaking even at a minimum.

 

[hwl]

Was the railway aware that working from home and online meetings were becoming a thing after 2010. I know people who were doing the odd day at home back in 2015 without any comments about it being unusual exceppt the classic about decorating the kids bedroom. And back then there was Skype which was in general use for meetings in 2015 to my knowledge.
Its easy to blame Covid for the change in peoples working arrangements and the societal change that brought. But the writing was on the wall. Covid just accelerated the change.
Did TOC's not see this coming????

The TOC and owning groups were seeing it, DfT on the other hand...

DfT had been noticing that central London employment growth had been translating into lower than historic increases in London commuting (and business travel). They didn't actually act on what the numbers were saying (i.e. reduce the ratio of new rail users : new jobs in franchise bidder assumptions) as that would be admitting to bad news.

TfL on the other hand were publicly commenting and acting on changes they were seeing from 2016 onwards i.e. Friday getting quieter in comparison to other week days.

SWR usage effectively peaked in 2016, however there were few one off in later years pre covid (e.g. Waterloo rebuilds blockades) but all the signs were there. (in SWR's case you could get on the trains at certain times, so physical limits too)

== Doublepost prevention - post automatically merged: 17 Jan 2024 ==

There is of course realities of the day as well, the narrative was of a overcrowded railway and the need for more seats not less passengers.
To be fair even now the rail network is busy but the challenge is that it's not busy busy with premium passengers hence the gap in revenue.

It will take time for services to adjust for the new flows as the railways aren't known for their ability to change quickly, but my take is that there is light at the end of the tunnel and my feeling is that this year's figures will show LNER at least more or less breaking even at a minimum.

The big gap is the number of business travellers and the typically higher than average fares that go with them.